Make-Whole Litigation in Bankruptcy

Make-whole provisions appear in more than eighty percent of corporate bond issuances. They emerged in the mid-1990s after traditional call provisions failed to protect bondholders from opportunistic refinancing. Outside bankruptcy, they are routinely enforced. But inside bankruptcy, they have generated extensive litigation over three issues: whether acceleration extinguishes the make-whole premium, whether the Bankruptcy Code disallows it as unmatured interest, and whether a solvent debtor must pay it regardless of statutory disallowance. This Note makes three arguments about how courts should treat make-whole provisions in bankruptcy. First, the apparent circuit split over make-whole-provision enforcement is illusory. Courts have reached different results because the underlying contracts have had materially different language, not because of conflicting legal principles or policy judgments. Second, the solvent-debtor exception is best understood as a corollary to the absolute priority rule rather than as a historical practice or equitable right. When a solvent debtor invokes § 502(b)(2) to deny creditors’ postpetition interest while distributing value to equity holders, the statutory disallowance operates as a de facto priority violation. Third, the core problem with make-whole provisions in bankruptcy is their economic structure. Because the standard formula does not adjust for the issuer’s default risk, the premium is largest when the borrower is in distress and the estate has the least capacity to satisfy other creditors. Therefore, this Note proposes that courts should subordinate bankruptcy-triggered make-whole premiums under § 510(c) rather than disallowing them or enforcing them at parity. This approach avoids the binary created by current doctrine. Disallowance eliminates the premium entirely and redirects the savings to equity holders, while the solvent-debtor exception pays the premium in full, which shortchanges junior creditors. Subordination would preserve the claim but pay junior creditors ahead of make-whole-provision holders.